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Will Lodsys Take a Bite Out of Apple’s Apps?

Wealth of Ideas Newsletter, June 2011

This summer, the big news in IP is a patent enforcement campaign centered on an upgrade feature in the apps used in the iPhone, iPad and iPod Touch. It’s nothing new for Apple to be sued. What makes this legal battle different is that it wasn’t Apple itself, but rather the independent iOS app developers, who were targeted as infringers.

Lodsys and Its Patent

Lodsys, LLC is a company that owns patents on “Methods and systems for gathering information from units of a commodity across a network” (U.S. Patent No. 7,222,078, or the ‘078 patent) and “Customer-based product design module” (U.S. Patent No. 7,620,565, or the ‘565 patent). According to Lodsys, these patents are infringed by the many developers who create apps for the iOS platform used in Apple’s iPad, iPhone and iPod Touch.

If an app contains an in-app “upgrade” button that allows the user to purchase a full-featured version of a lite or free app, its developer is likely to have received a letter from Lodsys early in May – alleging patent infringement and threatening legal action if no response was received within 21 days. Lodsys is seeking 0.575% of past, present and future U.S. revenue for apps that use the in-app upgrade feature.

And Lodsys was as good as its word: The company filed suit against the makers of several popular apps (including Twitteriffic) on May 31 – which was actually a bit earlier than the deadline – alleging infringement of the ‘078 and ‘565 patents. (“Lodsys chose to move its litigation timing to an earlier date than originally planned, in response to Apple’s threat, in order to preserve its legal options,” explained the company in a brief blog post.) You can view the Lodsys v. Combay et al complaint here.

Conflicting Rights Muddy the Waters

There is a major complicating factor to this brewing legal battle, however: iOS developers are prevented by their contract with Apple from entering into licensing agreements with third parties that would diminish Apple’s rights or bind Apple in any way.

What’s more, many iOS developers use Apple’s own Developer Toolkit to create their apps – and it contains an in-app payment option.

And to make matters even more interesting, Apple already has a license under Lodsys’ patents, apparently covering just such usage (but more on that in a moment). Many developers who received the Lodsys letter and information packet simply forwarded it to Apple, hoping for help with resolution.

Reaction to the Case

Unsurprisingly, Apple enthusiasts have met the news of the Lodsys threat with skepticism and sometimes, open hostility. Lodsys reported on its blog that it had received hate mail, angry emails and even death threats to its CEO, Mark Small.

The 0.575% figure in itself, though small, poses a dilemma for developers – most of whom could pay it fairly painlessly but can’t ignore the risks and implications of doing so. As one developer expressed it in an article on Engadget.com, “We certainly don't have the financial resources to fight this battle on our own, and to be honest, I am not sure I even want to tie our company into an extended legal battle in any case. But then, neither do I want to set a legal precedent that will be used to hurt other developers.”

The very fact that the amount requested is so small may be a significant factor in the outcome of the Lodsys matter. Some have speculated that Lodsys probably hoped for a faster resolution (and faster payment) by going after many individual developers rather than one big Apple and its powerful legal team – targeting the “low-hanging fruit” first. If that is Lodsys’ strategy, however, it could backfire, both because of the developers’ agreement with Apple and their reluctance to set a precedent for other developers.

And, of course, there’s always the chance Apple could be allowed to intervene in the lawsuit because of its financial interest in the matter.

Apple’s Initial Response

Apple’s Vice President and General Counsel, Bruce Sewell, sent a letter to Lodsys’ CEO on May 23, defending the iOS app developers. Among other things, Sewell’s letter (viewable here courtesy of Techdirt.com) states that Apple is covered by a license under Lodsys’ patents and is entitled to license patented products and services to Apple customers and partners. The letter also takes issue with Lodsys targeting app developers instead of contacting Apple itself.

The big question is whether Apple’s license under the Lodsys patents allows sublicensing. Apple’s answer is a definite yes, as Sewell states in his letter: “[T]he technology that is targeted in your notice letters is technology that Apple is expressly licensed under the Lodsys patents to offer to Apple's App Makers. ... Because Apple is licensed under Lodsys' patents to offer such technology to its App Makers, the App Makers are entitled to use this technology free from any infringement claims by Lodsys.”

Lodsys strongly disagreed, however, in another blog post published on May 31 – the day the company filed suit. “Apple is not ‘undisputedly licensed’ with rights that extend to 3rd party Developers,” Lodsys retorted, referencing Apple’s letter. “Developers relying on Apple’s letter do so to their own detriment and are strongly urged to review Apple’s own developer agreements to determine the true extent of Apple’s responsibilities to them.”

Possible Outcomes and Ramifications

Apple has not questioned the validity of either the ‘078 or the ‘565 patent – probably because it already has a license under those patents (although some have pointed out that these patents are just part of a portfolio that Lodsys acquired from Intellectual Ventures, which was actually responsible for licensing the patents to Apple and other big tech names as part of a bulk licensing deal).

It must be noted that although Apple asserted its rights under its license with Lodsys and demanded the retraction of the letters sent to developers, it stopped short of promising to pay the app makers’ legal fees if they’re sued by Lodsys. So since Apple didn’t succeed in shooting down this threat to its empire of apps with a single letter, there are a few other ways this dispute may play out:

Will any of the individual developers have to fight the lawsuit on their own, without Apple’s help? If they do, they will almost certainly challenge the patents’ validity and deny Lodsys’ claims of infringement – two standard defenses in patent litigation.

Individual app makers might join together and fight Lodsys as a collective entity. As of May 25, iOS developers Iconfactory, Villain and others had decided to pool their resources to hire legal counsel. That would lower their individual legal costs, but would also lower Lodsys’ legal costs – possibly prolonging the legal fight.

App developers who weren’t sued in the first round might just sit on the sidelines as long as possible, taking no action unless and until they are sued and waiting to see how Apple’s lawyers – or other developers – handle Lodsys.

If Apple is correct about its ability to transfer its licensed rights to third parties, then Lodsys doesn’t have a legal leg to stand on. If Apple’s legal team is mistaken on that point, though, things will get complicated and possibly set a precedent for other software-development ecosystems. And Lodsys pointed out in yet another blog entry that Apple’s maximum liability to its App Makers in the event of infringement is a whopping $50 – which, if correct, makes it possible that Apple will remain above the fray while the app developers battle Lodsys on their own dime.

It looks like Apple is ready to get involved in the litigation in some capacity, however. Apple filed a motion with the U.S. District Court for the Eastern District of Texas – where Lodsys filed suit against the developers – requesting to intervene in the litigation. Among Apple’s reasons for the request:

Apple’s intervention would be timely, coming as it does at the very beginning of the litigation – before the defendants answered Lodsys’ complaint.

Apple has a license under the two patents in suit, “the value of which depends on Apple’s ability to offer its licensed products and services to the Developers in return for the Developers’ agreement to pay Apple.” Not to mention that the infringement allegations “target Apple’s own products and services.”

Finally, Apple’s motion points out that without its intervention, the company’s interests may not be adequately represented by the defendants – who will most likely be interested in a quick, relatively inexpensive resolution that might not allow Apple to preserve its “broader license rights with respect to thousands of App developers.”

The common consensus among patent experts is that Apple’s request to intervene will probably be granted – making this case one to watch in the second half of 2011.

Apple’s App Store is known for the wide variety of apps it carries, which gives its iPad, iPhone and iPod Touch products a competitive advantage. Most certainly, Apple will do whatever it takes to protect that advantage and its arrangement with developers. The question is who will have to pay up (if anyone) and how much.

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